1] What are Equity Linked Saving Scheme (ELSS) Mutual funds? These schemes offer a tax deduction of up to Rs.1.50 lakh to investors under section 80C of the Income Tax Act, 1961. Potential for much higher returns compared to other tax saving instruments. Tax benefits under Section 80C with potential saving of ` 30,900 at the time of investment. ELSS is a Mutual Fund scheme that invests primarily in domestic equity markets. They come with a 3 year lock-in period which in turn allows the fund managers to take more aggressive calls yielding potentially better returns. ELSSs could be open-ended or close-ended in nature. Majority of ELSS schemes are open-ended. This means they are open for subscription on all business days.

2] What is upper limit to invest in ELSS?

There is no upper limit on investments. However, investments of only upto Rs.150,000 per year are allowed to be claimed as deductions under Section 80C of IT Act.

3] Who can invest in ELSS?

 Individual, HUF and specified investors under Income Tax Act, 1961), However, unlike the life insurance policies, you cannot invest on behalf of a minor and avail of tax deduction. It is suitable for all types of investors who are not risk averse and need to invest in tax planning instruments. Though there is no age to get started on an ELSS, it is good investment to have for those who are just starting their careers as it can help them shed their inhibition about investing in equities through mutual funds in a big way.

4] What is asset allocation in ELSS?

:ELSS mutual funds in simple term are mutual fund schemes that invests 65% in equity related instruments that are notified to avail tax benefits. Going by its name ELSS invests a majority of its corpus in equity and equity related products.

5] What is locking Period of ELSS?

An investment in ELSS comes with a 3 years lock in period and has tax benefits attached to it. You cannot redeem or switch to another option during this period. In the case of SIPs, each instalment is treated as a separate investment and will have a three-year lock-in period. So, if you started investing in an ELSS fund in April 2009, you can redeem the units bought in the first instalment only in April 2012. Those bought in May 2010 will be open for redemption only in May 2013.

6] Is ELSS returns tax free? What is Tax Advantage?

: No long term capital gains tax on withdrawal. No tax is levied when you redeem your investment after the lock-in period. If you observe, none of the returns from tax saving investment options other than PPF are tax free. NSC, Tax Saving Bank FD, Tax saving Post office TD scheme etc. all these tax saving option returns are taxable based on individual tax slab. However, interest in Public Provident Fund is tax free, but that comes with a 15 year lock-in period (apart from certain exemptions to withdraw in between). The only tax saving investment option that provides tax free returns for short period is ELSS Mutual funds. Since ELSS mutual funds invest in equity related instruments, these are classified under equity funds. Any returns received from equity funds after 1 year is tax free, hence ELSS funds which comes with a 3 year lock-in period, dividends/returns/capital gains from such funds are also tax free.

ELSS TAX Calculations:

Particulars Without ELSS/ 80C Tax Saving Investment With ELSS / 80C Tax Saving Investment
Gross Total Income (GTI) Rs.7,50,000 Rs.7,50,000
Exemption Under Section 80C Nil Rs.1,00,000
Total Income (TI) Rs.7,50,000 Rs.6,50,000
Tax on Total Income Rs.80,000 Rs.60,000
Tax saved on Investment Nil Rs.20,000
  • Illustration of Tax exemption for a male person less than 60 years in receipt of salary income for the Assessment Year 2013-14 (FY 2012-2013)

7] Are there any risks involved in investing in ELSS mutual funds? Will you get assured returns?

Since these funds invest 65% in equity, there is some element of risk. Moderate risk and High risk investors can consider this as a tax saving investment option. These are essentially diversified mutual funds, there is no guarantee on returns. So, apart from the performance of the broader market, your returns are dependent on the fund manager’s ability to pick the right stocks. This also means you must select the fund after proper research. Instead of picking a fund with high, but volatile, returns, choose one with a stable performance record.

8] What are options or plans in ELSS Mutual Funds like Dividend, growth or reinvestment?

a.         Growth option – In growth option income earned by the fund is not distributed to unit holders, Investor do not earn any dividend during the time it holds the fund. Any income/profit earned by the fund increases the NAV of the fund and vice versa. 

b.         Dividend option – Dividends declared are also tax free. The dividend is only a profit-booking exercise since a fund’s NAV reduces by the amount the investor receives as dividend. In the growth option, the amount remains invested for the entire tenure.

c.         Dividend reinvestments option – Avoid the dividend reinvestment option because you will find it difficult to exit the fund completely. There will always be some units that have not completed the lock-in period.If the investors choose this option the dividends declared by the fund are reinvested. For example an investor of Pune is holding 10000 units of a fund and the fund declares dividend @ 2.5 per unit, the total dividend of 25000 (10000*2.5) will be reinvested on behalf of the investor as a fresh purchase. The investor can claim deductions u/s 80C to the tune of dividend received which is Rs 25000 in this case.

8] What is difference between Mutual funds Vs ELSS ?

difference between Mutual funds ELSS Mutual funds
Tax Free Returns after 1 year of purchase after 3 year of purchase
Lock in period Generally no lock in period 3 years
Tax Saving Section Open u/s 80C

 9] SIP investment in ELSS?

Available in both SIP and lump sum investment options in ELSS. Investors can opt for systematic investment plan. Minimum investment required in SIP is Rs 500. An investment through SIP has a disadvantage as every monthly investment carries a lock in period. Monthly investments on a pre-specified date in mutual funds is possible through systematic investment plan (SIP). This type of investment is better suited to small investors who cannot invest a lump sum amount. SIP has the benefit of averaging out the cost of investors. As the amount of investment is fixed the units purchases every month varies depending upon the NAV of the fund. At a higher NAV the investor gets fewer units and more number of units at a lower price thus averaging out the cost of investors.

10]. What are the disadvantages of ELSS?

Risk factor is very high compared to NSC and PPF

11] How to Apply for ELSS?

  • To apply for ELSS an investor needs to comply with KYC regulations, Know your customer (KYC) is mandatory whereby investor needs to provide some personal details like PAN no etc. KYC helps in reducing financial fraud. After complying with KYC the investor can approach to Asset management companies for subscribing to ELSS,
  • Investor has to provide a photocopy of PAN Card along with the subscription form; the form should be filled properly and signed by the investor.
  • The subscription form and a cheque leaf of the investment amount should be submitted with the AMC.
  • In case of SIP (systematic investment plan) one additional form should be filled and signed by the investor.
  • The Investor has to select a date of SIP from the options provided in the form.
  • The Installment amount will be deducted from the investor’s bank account on that day of every month till further notice from the investor.

 12] How to choose or Criteria’s to choose ELSS

  • AUM – Asset under management is the amount of money the fund is managing. Higher AUM implies that the fund has many investors and has a good reputation.
  • Past performance – If the fund is performing well in the past, it is expected that the fund will keep performing well in the future. Generally we look at the past 3 yrs 5 yrs and 10 yrs return of the fund.
  • Sharpe ratio – Sharpe ratio is used to calculate risk factor of the fund’s portfolio. Sharpe ratio of the fund should be near 1.

13] How can an investor buy ELSS from mutual funds? How is the return in the ELSS compared to other schemes like PPF and NSC? What are Advantages of ELSS over PPF and NSC?

Lock-in Periods

Instrument Lock-in Period
ELSS 3 Years from the date of allotment of the respective Units
Bank Fixed Deposit 5 Years
PO Time Deposit 5 Years
NSC 6 years
PPF 15 Years (Partial withdrawal after 6 years)

 ELSS has the potential to give substantially higher returns as compared to that from PPF or NSC over the long-term. The returns from PPF or NSC are in the range of 8 per cent and at times may not beat inflation. PPF and NSC have a fixed rate of return somewhere close to 8% to 9% whereas return in ELSS varies depending upon the market fluctuation, however past performance of some ELSS funds shows an average return of 15% to 25% over a period of time.

Returns from ELSS could fluctuate depending upon the performance of the equity market and also the stock selection criteria of the particular fund manager. ELSS also scores over other tax-saving schemes since it offers tax-free return (long-term capital gains and dividends are totally tax-free as per the current tax structure). Only PPF offers tax-free return but it has a maturity period of 15 years.

14] Tax Saving Equity Linked Saving Scheme (ELSS) Mutual Fund in India

  • Axis Long Term Equity Fund (G) Mutual Fund
  • Baroda Pioneer ELSS 96 Mutual Fund
  • Birla SL Tax Relief 96 (G) Mutual Fund
  • Birla Sun Life Tax Plan (G) Mutual Fund
  • BNP Paribas Tax Advantage Plan (G) Mutual Fund
  • BOI AXA Tax Advtg -Eco (G) Mutual Fund
  • BOI AXA Tax Advtg -RP (G) Mutual Fund
  • Can Robeco Eqty TaxSaver (G) Mutual Fund
  • DSP-BRTax Saver Fund (G) Mutual Fund
  • DWS Tax Saving Fund (G) Mutual Fund
  • Edelweiss ELSS Fund (G) Mutual Fund
  • Escorts Tax Plan (G) Mutual Fund
  • Franklin India Tax Shield (G)  Mutual Fund
  • HDFC Long Term Advantage (G)  Mutual Fund
  • HDFC Tax Saver (G) Mutual Fund
  • HSBC Tax Saver Equity Fund (G) Mutual Fund
  • ICICI Pru Tax Plan (G)  Rank 2  Mutual Fund
  • IDFC Tax Advantage (ELSS) (G)  Mutual Fund
  • IDFC Tax Saver Fund (G) Mutual Fund
  • ING Tax Saving (G) Mutual Fund
  • JM Tax Gain Fund (G) Mutual Fund
  • JPMorgan Tax Advantage (G) Mutual Fund
  • Kotak Tax Saver (G) Mutual Fund
  • L&T Long Term Adv. Fund – I (G) Mutual Fund
  • L&T Tax Advantage (G) Mutual Fund
  • L&T Tax Saver Fund (G) Mutual Fund
  • LIC NOMURA Tax Plan (G) Mutual Fund
  • Principal Personal Tax Saver Mutual Fund
  • Principal Tax Savings Mutual Fund
  • Quantum Tax Saving Fund (G) Mutual Fund
  • Reliance Tax Saver (ELSS) (G)   Mutual Fund
  • Religare Invesco Tax Plan (G)         Mutual Fund
  • Sahara Taxgain (G) Mutual Fund
  • SBI Magnum Tax Gain (G) Mutual Fund
  • SBI Tax Advantage  (G) Mutual Fund
  • Sundaram Tax Saver (G) Mutual Fund
  • Tata Tax Advantage Fund-1(G) Mutual Fund
  • Tata Tax Saving Fund Mutual Fund
  • Taurus Tax Shield (G) Mutual Fund
  • Union KBC Tax Saver Scheme (G) Mutual Fund
  • UTI Equity Tax Saving (G) Mutual Fund
  • UTI Long Term Advantage Mutual Fund
  • UTI Master Equity Plan  Mutual Fund

The comparison of ELSS Vs other tax savings instrument has been given for the purpose of the general information only. Investment in ELSS carry high risk and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor-Brokers-Distributors-Agents-Consultants.

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